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Chapter 8
Discretionary powers of the Australian Securities and Investments
Commission
8.1
The Corporations Amendment (Future of Financial Advice) Bill 2011 (the
Bill) enhances the Australian Securities and Investments Commission's (ASIC's)
licensing and banning powers. Currently, ASIC only has the ability to prosecute
licensees: the Bill will allow ASIC to prosecute individual financial advisers
in breach of their obligations.
8.2
Under the new provisions, ASIC's licensing and banning powers will be
extended to:
- refuse or cancel/suspend a licence where ASIC has a reason to
believe a person is likely to contravene (rather than will breach) its
obligations;
-
ban a person (as opposed to an entity) who is not of good fame
and character or not adequately trained or competent to provide financial
services;
- consider any conviction for an offence involving dishonesty that
is punishable by imprisonment for at least three months, in having a reason to
believe a person is not of good fame and character for licensing and banning
decisions;
- ban a person if it believes they are likely to (rather than will)
contravene a financial services law; and
- ban a person who is involved, or is likely to be involved, in a
contravention of obligations by another person.[1]
8.3
These provisions are in response to concerns raised by ASIC about its
ability to protect investors by restricting or removing industry participants
who may cause investor losses. ASIC has encountered difficulty in this process
because the licence threshold entry is low and the threshold for cancelling a
licence is relatively high.[2]
8.4
Treasury noted the difficulties that ASIC has in taking a proactive
approach to protect consumers and that the Bill is intended to address this
issue:
It is recognised that while there are important reasons for
the current formulation of ASIC’s powers (around, for example, natural justice
for licensees and their representatives), current evidentiary thresholds make
it very difficult for a regulator to be proactive in protecting consumers
before an adverse outcome takes place. Under current arrangements, it is
relatively easier to be reactive by enforcing the law after it has been
breached and after potential adverse outcomes have already taken place.
In light of the above concerns, in the Ripoll Report
recommended that the Corporations Act should be amended to provide extended
powers for ASIC to ban people from the financial services industry under
section 920A (recommendation 6). It also recommended that ASIC be able to deny
a licence application or suspend or cancel a licence, where there is a
reasonable belief that the licensee ‘may not comply’ with its obligations under
sections 913B and 915C of the Corporations Act (recommendation 8).15
As a result of this recommendation, the Bill clarifies the
operation of ASIC’s banning power and sets out new tests under which ASIC can
exercise its discretion to remove persons from the financial services industry.[3]
Adequacy of ASIC's current powers
8.5
Currently, ASIC can suspend or cancel a license or ban an individual
after a hearing when a licensee has failed to meet their obligations, or if
ASIC has reason to believe that a licensee will not comply with their
obligations in the future. Following a hearing, ASIC can also suspend or cancel
a licence when it is no longer satisfied that the licensee is of good fame or
character, a banning order is made against the licensee or a key representative
of the licensee, or the application was materially false or misleading or
omitted a material matter.[4]
8.6
ASIC's position is that the current laws make it difficult to cancel a
licence or refuse to grant one. ASIC can only immediately suspend or cancel a
license of an entity in limited circumstances; for example, if a licensee has
committed serious fraud, is insolvent, ceases to carry on the business, or is
incapacitated.[5]
8.7
Further, ASIC argues that it has struggled to prove its case when its
decisions have been appealed before the Administrative Appeals Tribunal (AAT)
and that this 'makes it difficult to remove licensees who may potentially cause
investor losses in advance of an actual breach':[6]
If we were to express it in general terms, we would say that
the challenge that ASIC faces is that the barriers to entry to this industry
are, frankly, too low in terms of ASIC's ability to keep out players that we
believe are going to create problems, and it is too difficult for us to take
out planners who are causing significant problems—the 'bad apples' that the
industry is concerned about. To give you a sense of ASIC's test of this issue
of whether a person will or will not comply with the relevant law, the AAT has
rejected ASIC's finding that a person will not comply with the relevant law in
10 matters. There have been only two matters where the AAT has accepted ASIC's
finding that a person will not comply with the relevant law. So this is not
something where we are speaking about a hypothetical.[7]
8.8
In addition, the licensing regime focuses on entities rather than its
agents, such as employees or directors. This prohibits ASIC from refusing,
restricting or banning an individual from providing financial services.[8]
On the whole, ASIC relies on licensees to ensure the competency and integrity
of its representatives in the industry.[9]
Treasury noted broad concerns about 'the effectiveness of licensees being
responsible for the actions of their representatives, with implications for the
professionalism of the industry'.[10]
8.9
Moreover, ASIC is concerned that the current licensing regime does not
align with general consumer expectations that there are assurances that a
licensee will provide a high quality of financial services:
The relatively low threshold for obtaining an AFS licence and
the relatively high threshold for removing a licence is not well understood by retail
investors. Licensing, therefore, may give retail investors a sense of security
which is inconsistent with the settings of the regime. There is a perception
amongst some consumers that an AFS licence means that the licensee has been
approved by ASIC or that it signifies the high quality of the financial
services provided by the licensee, which is not the case.[11]
Submitters' views
8.10
Broadly speaking, the majority of submitters to the inquiry supported
the new discretionary powers granted to ASIC to prosecute individuals,[12]
provided there is clarity regarding the circumstances under which the powers
can be employed, and there are controls in place around the application of the
powers.[13]
The Australian Institute of Superannuation Trustees (AIST) stated:
Overall, AIST is supportive of the enhanced licensing and
banning powers that are proposed to be given to ASIC. ASIC has raised concerns
about its ability to protect investors and we feel that the changes slated to
improve the supervision of the financial services industry are critical to
creating greater trust within the Australian community toward the sector and
moving the financial planning industry further toward a profession.[14]
8.11
A number of submitters, however, argued that the new powers are too
broad and called for further clarity on how certain provisions will be applied
and interpreted. The Joint Accounting Bodies (JAB), for example, commented:
For us, the issue of giving any regulator such a broad power
was not something that we looked at lightly. However we had to look at what is
best for the clients and protecting their interest. ASIC has told us that often
they have been hamstrung in taking the necessary action because of the existing
legislation so giving them these powers would then allow them to take those
actions. However we do not want to give ASIC carte blanche and we think that
they need to set out in strict terms the circumstances in which they will use
those powers and how they will use those powers and how people can then appeal
against the use of those powers. Our concern was making sure that if ASIC had
this power that there were some rules around it and they did not just have the
capacity to take whatever action they wanted.[15]
Review process for ASIC decisions
8.12
The Australasian Securities Dealers Association Inc. voiced concern that
without adequate controls in place, ASIC's powers could be used maliciously:
Whilst we understand that the Government may feel the need to
give ASIC such sweeping powers, we are concerned that appropriate check and
balances are not in place to prevent malicious pursuit of advisers or licensees
under their supervision. Most enforcement agencies throughout the developed
world have an internal agency or overseeing body that has the ability to
conduct investigations.
Banning orders, enforceable undertaking and disqualifications
are handed out by ASIC and in most cases with good reason. We do however see
that if such a malicious pursuit did occur under 920(1A)(d) then the tarnished
image of the adviser or AFSL would be significant.[16]
8.13
The Financial Services Council called for assurances that ASIC's
enhanced powers will be used only if a hearing for licensees and individuals
has occurred:
Given the widening of ASIC's powers, the legislative scheme
should ensure that all decisions involving the exercise of those powers should
be made after affording affected individuals or licensees an opportunity to
appear at a hearing and to make submissions to ASIC, and all decisions should
be reviewable by the Administrative Appeals Tribunal and Federal Court.[17]
8.14
The Explanatory Memorandum (EM) does indeed outline that 'existing
review rights in relation to ASIC decisions about licensing and banning
continue to apply' (including those under the provisions of the Bill) and, as
such, are subject to review by the Administrative Appeals Tribunal.[18]
8.15
As a matter of general principle, ASIC must give persons affected by its
decisions an opportunity to be heard (either in writing or orally). The Corporations
Act and Regulations specifically give a person a statutory right to a hearing
in certain circumstances. This includes instances where a decision is made to
refuse, vary or revoke a license:[19]
Under s913A of the Corporations Act a person may apply to
ASIC for an Australian financial services licence. ASIC must, before refusing
to grant a licence, give the affected person an opportunity to have a private
hearing.
Under s914A(1) of the Corporations Act ASIC may impose
conditions on a financial services licence. If ASIC imposes conditions when the
initial licence application is granted the affected person has no statutory
right to a hearing (see s914A(3)). If, however, after granting the initial
licence, ASIC proposes to vary, revoke or impose additional conditions the
affected person does have a statutory right to be heard at a private hearing.[20]
Further clarity required: 'Reason
to believe' and 'likely to contravene'
8.16
A number of submitters claimed that certain provisions of the Bill carry
significant uncertainty for financial advisers, particularly the provision
allowing ASIC to ban or refuse a license on the grounds that a person is
'likely to contravene' obligations under the Act.[21]
8.17
The Financial Planning Association of Australia (FPA), for example, expressed
concern that the phrases 'reason to believe' and 'is likely to contravene' are
too flexible and allow ASIC to take action prior to a breach being committed, with
minimal obligation on the Commission. The Superannuation Committee of the Law
Council of Australia commented:
The Committee is concerned by the breadth of the discretion
these powers give to ASIC. There is no standard of proof which must be
satisfied by ASIC and no prescription of the matters which go to whether a
person is “likely to contravene” their obligations. Given the consequences that
can flow from an exercise of ASIC’s powers under new sections 913B(1)(b),
915C(1)(aa), 920A(1)(f) and 920A(1)(h), including the closure of a licensee’s business,
the Committee submits that what is required in order for ASIC to form the view that
a licensee is “likely to contravene” their obligations should be subject to
greater certainty.[22]
Requests for a legislated statutory
test
8.18
The FPA recommended that the EM and/or the Regulations should detail an
objective test that ASIC would have to meet to show reason to believe that an
applicant, licensee or provider is 'likely to contravene' its obligations. The FPA
suggested that ASIC should have a range of appropriate actions it can take if
it has reason to believe a licensee, representative, applicant or provider is 'likely
to contravene' its obligations, such as further investigations, an Enforceable
Undertaking or education requirement.[23]
8.19
The Australian Bankers' Association (ABA) was also concerned about the
breadth of ASIC's new discretionary powers and application of penalties,
particularly in the absence of a reasonable steps defence. ABA agreed that
there is a need for regulations to address these concerns.[24]
The Joint Accounting Bodies agreed with this view, and recommended that ASIC
issue a statement which sets out how they intend to use the proposed powers, particularly
in relation to the terms 'believe' and 'likely to contravene':
These are broad terms and therefore have the capacity for
misuse. While we believe that ASIC has no intention to misuse such powers, in
order to generate confidence in the new system ASIC must set out how it will
interpret the law and how it will implement them.[25]
8.20
The Westpac Group also called for objective criteria that ASIC would be
required to follow when exercising its new discretionary powers. The Westpac
Group suggested the criteria could include items such as:
- the number of previous similar contraventions the
individual/licensee holds;
- the likelihood of a contravention remaining unrectified; and
- the extent to which the likely contravention indicates the
licensee or individual will not comply with their obligations in general.[26]
8.21
At this stage, Treasury has not released a statutory test or any
specific criteria ASIC would follow that would equate to ASIC having reason to
believe that a person is 'likely to contravene' a financial services law. However,
there is some further clarification provided in the EM which outlines the due
diligence and evidentiary processes proposed for ASIC:
The statutory test is whether the applicant is likely to
contravene the obligations under section 912A. ASIC may take into account any information
relevant to this question, such as:
- conduct of the applicant that shows deliberation and planning in
wilfully disregarding the law;
- the extent of compliance by the applicant with analogous obligations in
another regime; or
- any other conduct of the applicant that may lead ASIC to conclude, on
reasonable grounds, that the applicant is not likely to comply.[27]
8.22
The EM highlights that the current legislative standards are too onerous
for ASIC to prove that a person is 'likely to contravene' a financial services
law, and the new provisions allow ASIC to act appropriately in these
circumstances:
In the 10 years since the introduction of the Financial Services
Reform Act, interpretation of this provision has tended to a view that ASIC is
required to believe, as a matter of certainty, that the person will contravene
the obligations in future. Such a standard would be so onerous that it could
result, in practice, in ASIC never being able to refuse a licence using this
part of the test. This new formulation is designed to ensure that ASIC can more
appropriately account for the likelihood or probability of a future
contravention.
8.23
The committee acknowledges the concerns of submitters and notes that
ASIC has undertaken to provide further regulatory guidance on its amended
licensing and banning powers.[28]
In addition, it suggests that the committee has itself an important role to
monitor the way in which ASIC uses these new powers.
8.24
The committee notes that as part of its ongoing oversight of ASIC, it
will closely monitor the exercise of ASIC's new licensing and banning powers as
conferred through the Future of Financial Advice legislation.
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